Borrowers vs. Savers: Who Is Winning?

Easy answer. The house is winning. The house always wins.

This chart shows the average interest rate paid on credit cards at commercial banks minus the yield of the 3-month Treasury bill.

There has never been a worse time to buy Treasury bills using a credit card, unless of course, you are the government offering 0% Treasury bills or commercial banks offering 16% credit cards.

The jury is still out on whether or not there has ever been a worse time to buy GameStop stock using a credit card. That said, it might be worth pointing out that Reddit users and Robinhood investors are most certainly not the house.

VPU Performance v.001

As some of you may know, I decided to go all in on the Vanguard Utilities Index Fund (VPU) inside my IRA at the end of December 2020. This is a long-term investment. All dividends will be reinvested back into the fund. I intend to provide an update at the end of each month to show its performance since the purchase was made. This is the first update.

The red target is the 1.67% 30-year Treasury Bond yield at date of purchase. The yellow target is the 3.53% EE Savings Bond yield (if and only if held a full 20 years). The green target is a 6.0% growth rate that combines a 3.1% dividend, 2% inflation, 1% real yield growth, and 0.1% fund expenses.

Since I am using this fund as a bond replacement in a ZIRP world, my expectations are very low. Riding the yellow target would be satisfactory. Anything more is just a bonus. Anything below the red target would be unsatisfactory. Falling off the chart to the downside would clearly be an epic failure.

Months Elapsed: 1
Total Growth: 1.00%
Annualized Growth Rate: 12.67%

So far, so good. One month down, 199 to go. Apologies if this feels like watching paint dry. It is my hope that it will be similarly uneventful for the next 16+ years. One can always hope.

Trading Update

Bought all the tax-deferred savings bonds for the year that the government would allow. Didn't see any reason to wait.

1. 0.1% EE Savings Bonds.

Clearly not buying these for the 0.1% interest rate. If and only if they are held 20 years, then they are guaranteed to double though. That works out to 3.53% per year. That's much higher than the 1.6% yield on the 20-year Treasury bond.

2. 0.0% I Savings Bonds.

Clearly not buying these for the 0.0% interest rate. They do appreciate based on the consumer price index though. The 0.0% fixed rate is higher than the -0.29% fixed rate on the 30-year inflation protected Treasury bond (TIPS).

This has nothing to do with today's stock market action, or even the pandemic. I've been buying savings bonds off and on since 2000, and as long as they offer good relative safety and value then I will no doubt continue to do so.

For those curious about my long-term purchase of VPU (and/or enjoy watching paint dry or water boil), I intend to post a chart on (or shortly after) the last trading day of each month. That will allow you to laugh at my risk taking folly and/or watch it slowly grow with me well into the distant future. :)

The Sarcasm Report v.281

Some are arguing that there may be excess speculation in the markets, but I take comfort in the bitcoin to GameStop stock price ratio. It’s really starting to stabilize.

The Clown Horn Report v.002

 

This chart is for the naysayers who thought we’d never hit 10% total annual credit market growth again. They clearly did not factor in Donald J. Trump’s business and pandemic acumen.

It wasn’t easy starting with $73.49 trillion in Q2 2019. We did make it to $81.08 trillion in Q2 2020 though, for a 10.3% gain.

$7.59 trillion in extra debt here, $7.59 trillion in extra debt there, and pretty soon we’re talking real money.

World War ZIRP

This chart shows money with zero maturity as a fraction of GDP.

1. Over the long-term, I fully expect to see this ratio continue to climb. We know that MZM will continue to climb. The only real question is how fast GDP climbs relative to it. Over the short-term (Q3 2020), GDP is currently winning, as some parts of our economy are rebounding from the pandemic. Over the long-term, I don’t think GDP has any hope of winning though. It’s competing with, in Ben Bernanke’s words, "a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost."

2. Will more dollars mean more consumer price inflation? Over the short-term, maybe. Pent-up demand may need to work through the system. Over the long-term, I doubt it. And when I say long-term, I only mean in my lifetime. And I’m getting old.

3. As seen in the chart, the rising interest rate problem of the 1970s wasn’t due to too many dollars relative to GDP. Quite the contrary. Those expecting a return to the 1970s need to understand this. I can sympathize with the theory, since I do have stagflationary in my name. However, banks only pay higher interest when they need to attract more deposits. Banks are not charities. Expecting banks to pay much higher interest rates when they are already flooded with money makes little sense to me.

4. Flooding banks with money isn’t just happening in the United States. It’s happening all over the world. As a saver, other than a modest investment in savings bonds each year, there’s nowhere relatively safe left to hide. Think of it as a monetary pandemic. The first outbreak was in Japan. None of us were immune. We’re all infected now. There is no cure. It is way too late for monetary vaccinations.

5. So, cash is trash. Right?  Not so fast. It is my belief that the monetary leaders of every country know that we are all spending above our means. No monetary leader wants the inevitable collapse to happen on their watch. There’s no way out for them either. So, what do they need in order to delay the eventual outcome? ZIRP and low inflation. In theory, ZIRP allows nearly infinite borrowing for everyone at essentially no cost, especially for loans that have interest only payments. Low inflation stops people from hoarding goods. Need both, just like Japan. That’s the only solution there seems to be. When in a hole, dig deeper. A deeper hole is a horrible solution for future generations, of course.

6. Will we see 40 year mortgages in my lifetime? Yes. We’ve seen the duration of auto loans increase. Why not loans on homes? Anything is possible in a world with century bonds. Pretend and extend!

7. I kind of joke. 40-year mortgages are already available. I’m still alive. Yes!

8. This is why I have embraced interest rate sensitive utilities, even as some believe that utilities are in a bubble. If I’m wrong on interest rates, then I’ll be wrong on utilities. It mostly comes down to where interest rates are headed over the next decade or so. I’m sleeping okay since the decision to buy utilities in December. At the very least, ignorance is bliss.

9. Anyone who knows with certainty where we are headed is a fool. We’ve never been in this situation before. Historical data isn’t much more useful than tea leaves. That’s especially true of historical data before we fell off the gold standard. What should the P/E of the stock market be in a world potentially trapped in ZIRP long-term? Perhaps we’ll find out in hindsight. After all, today’s data is tomorrow’s historical data. And so on.

My Long-Term Inflation Expectations Remain Well-Anchored

 

This is a can of petite diced tomatoes. Target will currently sell it to us for 49 cents. It’s not on sale. That’s the normal price.

If we spend $35, they will ship it to us for free. If we buy 72 cans, that would cost us $35.28. Each 14.5oz can weighs almost exactly 1 pound (due to the extra weight of the empty can). That means the total shipment weighs a whopping 72 pounds (expect some dented cans).

At the beginning of the pandemic, we also paid 49 cents for these cans at Target. How is it that pandemic hoarding, intermittent shortages, and massive monetary stimulus have not caused the price to go up? How can Target continue to ship us goods this cheap even as online shipping demand has skyrocketed?

It’s not just petite diced tomatoes. I’m only using this as an example. It’s pretty much everything we’ve stocked up on from Target, Costco, Walmart, and Amazon since the beginning of the pandemic.

In related news, it’s not too late to read the 2008 Hyperinflation Special Report on Shadowstats. For what it is worth, I’m personally waiting until their $175 subscription price starts inflating. I need to see them put their money where their mouth is. Even a token one cent increase to $175.01 would attract my attention. Is it too much to ask? It’s been the same price for more than a decade. In my opinion, it’s very difficult to sell a hyperinflation story without at least one subscription price increase in 12+ years!

Our government is definitely taking a “shock and awe” approach to thwarting deflation. Will it be enough to counter the increased pace of automation due to a pandemic though? Robots don’t get sick, nor do they require living wages. Based on Japan’s “success” at thwarting deflation, my long-term bet is on the robots. Their present seems to be our future.

January 1, 2021
NHK World - Japan: Autonomous delivery robots hit Japanese streets

A robot knocks on your door to deliver a freshly brewed cup of coffee, which you ordered just minutes earlier with one tap on your smartphone. This vision of the future could soon turn into reality as Japanese companies have started testing autonomous delivery robots on public streets. This comes as the need for social distancing amid the coronavirus pandemic has pushed up demand for autonomous delivery services.

Trump Was Dune’d to Fail

And Kynes, returning the stare, found himself troubled by a fact he had observed here. This Duke was concerned more over the men than he was over the spice. He risked his own life and that of his son to save the men. He passed off the loss of a spice crawler with a gesture. The threat to men’s lives had him in a rage. A leader such as that would command fanatic loyalty. He would be difficult to defeat. Against his own will, and all previous judgments, Kynes admitted to himself, “I like this Duke.” - Frank Herbert, Dune

I think the similarities between President Donald J. Trump and Duke Leto Atreides are uncanny, other than the 400,000+ American pandemic deaths while Trump spent much of his time golfing, Trump continually throwing his loyal men under the bus to save himself, Trump’s inquiries into self-pardoning, “Sleepy Joe” easily defeating Trump, Trump’s lowest approval rating of his presidency (nearly of any American presidency), and that Trump’s not a fictional character (much to the dismay of most Americans), of course.

Other than that, uncanny!